The rise and fall of foreign exchange market intervention as a policy tool

The premise of the paper is that the fervor for foreign exchange market int ervention by U.S, and European monetary authorities has ebbed in recent yea rs. A pattern of initial belief in the effectiveness of foreign exchange ma rket intervention has recently been eroded, as is revealed by the absence o f intervention in circumstances that in earlier times would have invoked it . Only the Bank of Japan among central banks of the developed world has not thusfar abandoned its faith that intervention can change the relative valu e of the yen as determined by market forces to conform with its notion of w hat that value should be. To explain why U.S. and European monetary authori ties no longer believe that intervention is a tool that works, I review the equivocal record of past episodes, the inconclusive results of empirical r esearch, and the problems of implementation that intervention advocates ign ore.